The Two-Way

8:29 am

Thu October 17, 2013

Economists: Shutdown Will Shave Half-Percent From Quarterly GDP

The government shutdown has taken a toll on the nation's economy and despite a deal that sidesteps a debt default and restarts the government (at least for a few months), growth forecasts for the last quarter of the year are being scaled back.

Economist Mark Zandi of Moody's Analytics has shaved his gross domestic product forecast from a 2.6 percent annualized rate to 2.1 percent for the last three months of the calendar year.

"If the Treasury fails to make payments to Social Security recipients and Medicare providers, to bondholders, whoever that may be, it would clearly undermine [investor] confidence and would lay the foundation for the economy going back into recession," Zandi says. "And if this would extend for any length of time, into November, I think the recession we would see would be severe, on par with the Great Recession, the downturn we just went through."

"Even with the shutdown of the United States government and the threat of a default coming to an end, the cost of Congress's gridlock has already run well into the billions, economists estimate. And the total will continue to grow even after the shutdown ends, partly because of uncertainty about whether lawmakers might reach another deadlock early next year.

"A complete accounting will take months once the government reopens and the Treasury resumes adding to the country's debt. But economists said that the intransigence of House Republicans would take a bite out of fourth-quarter growth, which will affect employment, business earnings and borrowing costs. The ripple from Washington will be felt around the globe."

"[The] the biggest failure of the agreement, analysts say, is that it keeps the government operating for only a few months, with a new need to fund agencies and raise the debt ceiling coming in the first five weeks of 2014.

"As a result, economists say, consumers and businesses are likely to hold back on spending and investment during the important holiday season, knowing that a similarly economy-shaking political showdown might be right around the corner.

" 'If people are afraid that the government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they'll remain afraid to open up their checkbooks,' Standard & Poor's U.S. chief economist Beth Ann Bovino said in an analysis. 'That points to another Humbug holiday season.' "